Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Euro Crisis and Holland Mortgage Debt, Those Dutch Tulips Ain't Looking All That Rosy

Interest-Rates / Eurozone Debt Crisis Sep 12, 2012 - 12:18 PM GMT

By: Raul_I_Meijer

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleWell, the German Supreme Court decision is through, and it looks positive at a first superficial glance, so what could go wrong from here?

Sorry to break it to you, but plenty could. It’s amusing to see that decisions like these, the German court one or last week’s Draghi bond buying announcement, are seen as being positive for markets and/or entire economies, while in fact the only reason they have to be taken in the first place is that the situation is getting worse all the time.


If things were fine, Draghi wouldn't have to buy bonds, and the ESM wouldn't have to be propped up with measures that threaten to violate any constitution or sovereignty. Markets these days rise on bad news, because bad news makes politicians and central bankers hand out the people's money and checkbooks.

In the shadow of the ESM decision, European Commission President Manuel Barroso today, in his "State of the Union" speech, introduced a grand plan plan to hand the ECB what is basically total control over European banks, and move towards political union. As per today's Wall Street Journal:

Mr. Barroso said Europe needs a leap forward in the integration of member states to back up the common currency. He outlined the plans—launched Wednesday—for a single supervisor for all euro-zone banks that will allow some banks to gain access soon to emergency bailout funds.

The Commission asked legislators to adopt the proposal by year-end, a move that will face challenges from a European Parliament seeking to strengthen enforcement efforts and form a requirement that all EU states must unanimously agree the proposal. "We want to break the vicious link between sovereigns and their banks," Barroso said Wednesday.

The proposal gives the European Central Bank authority to issue and revoke banking licenses while ensuring banks comply with capital, leverage and liquidity requirements. The ECB would also be able to carry out early intervention measures when a bank breaches those requirements. [..] "We will need to move toward a federation of nation states. This is our political horizon. This is what must guide our work in the years to come..."

Of course the EU is already a federation of nation states. It's in the level of integration, in the details, where the devil resides. As I wrote recently, former Spanish PM Jose Maria Aznar said only last week that the drive for full fiscal and political union is "deeply misguided": "A United States of Europe is an impossible idea. It is a very serious mistake to try to destroy the nation states". Now Barroso may claim that you can still have a nation state after you have given up your fiscal, political and monetary powers, but that seems mere semantics. Granted, Barroso was shrewd enough cover his tracks:

He called for a clean break with how treaty changes have been pushed through in the past, saying they should win direct popular backing and not be pushed through with the "implicit consent" of citizens.

A good example of what this could lead to, and a solid indication of why Barroso's ideas will never ever be accepted by the people of Europe, can be found in the demands the Troika placed on Greece today. They want to fire 150.000 civil servants, raise the retirement age to 67 years immediately, cut "lay-off compensation" by 50%, and, wait for it, introduce a 6-day working week, and stretch the working day to 13 hours. In theory, that could lead to a 78-hour working week.

As my writing partner Nicole Foss remarked in true Monty Pythonesque Four Yorkshiremen spirit: "I wonder when we'll see the 8 day working week at 25 hours per day". Not surprisingly, the Greek government isn't thrilled at the demands; they can already see their heads end up on top of pointed sticks alongside the winding streets of Athens.

Want to take a guess at how many European countries will voluntarily sign up for similar treatment?

Another event in this packed day (besides the iPhone 5 launch) are the parliamentary elections in The Netherlands (a.k.a. Holland, and yes, I still carry the passport). I've been following campaigns in the past two weeks from the corner of my eye, and even there it's not pretty. There is absolutely nothing being said that reflects Dutch reality. There'll be another coalition government that will lead the country into another 2-3-4 years of delusion. Until either the infighting picks up again, or the real economic situation can no longer be denied. Whichever comes first. Hard to call that one.

And when the latter happens, the blow will be devastating: everyone will look to the government for salvation, but the government will face Troika demands like those presently forced upon Greece. For now, however, I bet you can't find a soul in the whole country who would think this is a realistic scenario. But really, just thinking and saying that you're rich doesn't make it so.

To understand how grave the Dutch plight may be, I’ll take a look at the household debt situation in Holland, mainly through a report issued last week by the government's own Central Bureau for Statistics (Centraal Bureau voor de Statistiek).

One thing to remember: in the election campaign, the only true household debt related issue that was discussed was mortgage interest deductibility, a longtime stalwart. Do they cut it entirely, do they keep it, or do they cut it very slowly? They can't agree. And still that is where the essence of the Dutch debt trouble lies: mortgage interest deductibility. Along with a majority of mortgages being interest only, so people pay interest, but no principal, and that interest is tax deductible to boot. In Holland you CAN have your cake and eat it.

Nor does the mess stop there: over 80% of mortgages are guaranteed by the Dutch government through the Nationale Hypotheek Garantie, the National Mortgage Guarantee. Which is where everyone looking to the government to save them will come in, as soon as house prices start falling for real. But at that point, as I said, the same Troika that now visits Athens may have moved to The Hague (in Holland the government does not reside in the capital, Amsterdam). I can already hear the derisive feel-rich Dutch reactions to my raising such options ...

One issue that is hardly ever addressed when it comes to such matters as the ESM is the one of those of the parties involved that are perceived as strong and rich. When the ESM, and bail-outs in general, are discussed, conversation circles around, on the one hand, the PIIGS countries' debts and needs, and on the other, the rich countries' willingness to pay for them. It's rare to see the rich countries' ability to pay questioned, it's all about willingness. Nice smoke screen, but not very convincing once you look behind the curtains.

As an introduction, I’ll start off with some quotes from an article that Ambrose Evans-Pritchard wrote back in April this year - the fact that it comes with a great EPA picture of far right leader Geert Wilders (the only politician to call for Holland to leave the eurozone) is a mere bonus:

Fitch doubts Dutch AAA as property slump reaches 'coma'

Fitch Ratings has issued the clearest warning to date that Holland faces losing its AAA rating if it fails to deliver austerity cuts or lets political conflict intrude on economic management. [..]

The warning comes as Dutch property tips into deeper slump, with the inventory of unsold homes nearing South European levels. Household debt is the eurozone’s highest at 249% of income, compared with 202% in Ireland, 149% in the UK, 124% in Spain, 90% in Germany, 78% in France and 66% in Italy - according to Eurostat data from 2010.

[..] home prices have fallen 11% from their peak in August 2008 [..]

The stock of unsold properties has doubled to 221,000 since 2008 as "Te Koop" signs proliferate on Dutch streets, almost double the declared level in the US on a per capita basis. [..]

Public debt will climb to 76% of GDP by 2015, according to the official Bureau for Economic Policy Analysis (CPB). [..]

The central bank said in its Financial Stability Report that the country faces a nasty mix of problems. "The outlook for financial stability in the Netherlands is worrying. Dutch households have almost the highest debt in the world. Declining real wages and rising unemployment are putting pressure on incomes. The steady fall in house prices is weakening their position while also increasing the likelihood of debt problems."

The report said credit outgrew the deposit base of lenders during the property bubble, leaving banks dependent on fickle capital markets. "Short-term funding may dry up overnight, as in 2008 when the interbank market stalled and again in the summer of 2011. A drop in house prices will compromise the issue of mortgage-covered bonds, while significant loan losses may lead to margin calls by the owners of such bonds," it said.

The regulator said Dutch pension funds are deeply underwater. They need €90bn in extra funding to meet future obligations, and $200bn to restore buffers.

Critics say Holland’s policy of full tax deductibility on mortgages as well as loan-to-value caps of 112% (with stamp tax) encouraged a debt spree along Anglo-Saxon lines.

To see where this places Holland internationally with regards to household debt, here's a WSJ graph:

And by the way, there's more going on below the surface, as is evident in this graph from Lombard Street Research from a more recent (June 14) Ambrose article:

Dutch Disease

As if matters were not bad enough already in Euroland:

Dutch retail sales collapsed by 11pc in April, even worse than the 9.7pc drop in Spain. (Royal holidays cannot explain this).

As you can see from today’s chart by Lombard Street Research, it is a sight to behold.

OK, at last the Dutch Central Bureau for Statistics report that caught my attention last week, which is kind of based around a comparison between developments in Holland and Germany. Still, the bare Dutch numbers steal the show. A few snippets; the translation is mine.

Mortgage debt in Holland

Total long term Dutch household debt rose from 56% of GDP in 1995 to over 125% in 2011. More than 90% of this is mortgage debt. The rise in long term debt was faster than in France, Spain or the UK. In Germany, relative household debt even fell. Hence, while Germany had the same debt quota as Holland in 1995, in 2011, it had half that of Holland.

Along with mortgage debt, home prices in Holland rose at an explosive pace until the [2008] crisis. Around the turn of the century, they rose close to 20% annually.

From 1985-2007 average Dutch home prices went up 228%, while price inflation was 56%. In Belgium, Spain , Ireland , the UK and France they also rose more than threefold. In Germany, however, home prices fell. [..]

The relationship between home prices and mortgage debt is complex. Normally, newly closed mortgages rise along with home prices, but in other countries with rising home prices mortgage debt rose less fast than in Holland. Mortgage interest deductibility seems to have played a decisive role in this. [..] Germany offers far less fiscal advantage for home buyers.

Though mortgage interest deductibility stems from 1893, it was only in the 1990s that its benefits were fully employed through new mortgage constructions, like savings mortgages and investment mortgages, the essence of which is that only the interest is paid until the mortgage reaches maturity. Only then is the principal paid off. Until then households pay into a savings (investment account). Put together, these plans allow for lower monthly costs and higher purchase prices. This pushed home prices upward.

The fiscal attractiveness of high debt caused rising home prices to translate into extremely high mortgage debt levels. In other countries people did pay down the principal, because there was no drive to let debt remain as high as possible for as long as possible. [..]

The report goes on a bit more, but the gist is clear. You may not be overly surprised to learn that my initial reaction when reading it was: Wow wow wow!!. You see, my view is that this constitutes criminal behavior by a government and the banking industry it shares a pillow with. When you make it attractive for people to rack up as much debt as they can, there is only one possible outcome: some form or another of debt slavery.

It's very hard to get any closer to Charles Ponzi and Bernard Madoff than this, but at least those guys were not officially sanctioned by a government. The US subprime boondoggle has absolutely nothing on this; the only difference is that the Dutch real estate market has fallen just some 11% until now, not the 33% and counting in America. But it will, and then some; Charles Ponzi guarantees it on his mother's grave.

To top it off, the Statistics Bureau has the gall to state that total domestic real estate value has increased!. How does that work? Well, you hand everyone who wants it a truckload of free credit, they all buy their neighbor's homes, for which they don't have to pay down any principal, rinse and repeat as often as you can (get away with), and voilà!, everyone's richer. Easy as pie. I'm not joking: that is a pyramid scheme if I ever saw one.

And as I said before, none of this was hardly mentioned at all in the run-up to today's Dutch elections, though the government's very own statistics bureau published the numbers just last week. Truly incredible.

Yeah, I cracked some numbers too, it's probably good to get this into a US perspective.

The US has 314 million inhabitants, 18.8 times as many as Holland, which has 16.7 million (on a plot of land smaller than many if not most US states).

Holland's mortgage debt is €670 billion = $864.3 billion (at today's 1:1.29 rate), times that 18.8 would equal $15,712 trillion, while actual US debt is "only" $10.3 trillion. So Holland's mortgage debt is over 50% worse than America's. Which you thought was bad enough ...

That is €670 billion/16.7 million = €40.119 x 1.29 = $51,753 per capita. But only 54% of Dutch people are homeowners (vs 66% of US in 2011).

So 54% of 16.7 million = 9.1 million, carry the €670 billion = $864.3 billion debt, which comes to €73.626 ($94,977) per capita. For young families with 2 children, average(!) debt is €294.504 ($379,908).

And it gets worse: older people have obviously paid off much more on average, plus they have more savings on average. In other words, young families are sitting on highly explosive situations. Through less income, lay-offs, or other negatives, they can lose it all basically overnight (average income in Holland is €32.500 or $42,925).

Also, about those mortgage related savings and investment accounts: what do you think they are invested in? Not government bonds, at 1.x%, that’s for sure. Try risk. Try the stock market. Which rises only when more taxpayer money (including Dutch) is handed to the markets. Running to keep still doesn't do it justice.

With these levels of household debt it would seem obvious that the Dutch are sleepwalking into disaster, but don’t expect them to wake up anytime soon (or their politicians to warn them, apparently). After all, over 80% of mortgages are "insured", so why worry?

However, as is the primary characteristic of why any Ponzi scheme must and will collapse, this one too will run out of - enough - new entrants. And probably already has.

And this is a country that is supposed to pay tens of billions of euros to save its "poorer" cousins through the ESM, the EFSF and the ECB?! Come on!

As I said before, the "richer" countries in Europe need breathing space in order to save themselves. Because they're not nearly as rich as they like to think, and they like to make you think too. It would be far more realistic to let the weaker eurozone countries go, because not doing so risks imploding the entire edifice. And that in turn can and will lead to very ugly consequences.

Europe is a powderkeg in waiting. But don't tell the Dutch that. They like their delusions too much. Then again, don’t we all?

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules